IFRS And GAAP Accounting Quiz: Test

1. The cash conversion cycle is a measure of a company's liquidity

True

False

CCC=Days of inventory on hand + days of sales outstanding - number of days of payables

As a whole, a shorter CCC means greater liquidity.

Explanation

CCC=Days of inventory on hand + days of sales outstanding - number of days of payables

As a whole, a shorter CCC means greater liquidity.

2. Under ******, the value of property and equipment and identifiable intangible assets can be revalued upward, but under ******* they cannot.

IFRS / US GAAP

US GAAP / IFRS

Under IFRS (International Financial Reporting Standards), the value of property and equipment and identifiable intangible assets can be revalued upward. This means that if the fair value of these assets increases, the company can choose to increase their carrying value on the balance sheet. On the other hand, under US GAAP (Generally Accepted Accounting Principles), revaluation of property and equipment and identifiable intangible assets is generally not allowed. This means that the carrying value of these assets will remain at their original cost, unless there is an impairment that requires a write-down.

Explanation

Under IFRS (International Financial Reporting Standards), the value of property and equipment and identifiable intangible assets can be revalued upward. This means that if the fair value of these assets increases, the company can choose to increase their carrying value on the balance sheet. On the other hand, under US GAAP (Generally Accepted Accounting Principles), revaluation of property and equipment and identifiable intangible assets is generally not allowed. This means that the carrying value of these assets will remain at their original cost, unless there is an impairment that requires a write-down.

3. What are the two main financial reporting standard-setting bodies?

IFRS and US GAAP

IASB and FASB

SEC and FSA

IFRS and GAAP are sets of actual accounting standards. SEC and FSA (Financial Services Authority, basically the UK's SEC) are regulatory authorities.

Explanation

IFRS and GAAP are sets of actual accounting standards. SEC and FSA (Financial Services Authority, basically the UK's SEC) are regulatory authorities.

4. Extraordinary items are not expected to continue in future periods.

True

False

Remember, they are only allowed under US GAAP, but even still, they are not expected to continue in future periods. It should be a one time thing.

Explanation

Remember, they are only allowed under US GAAP, but even still, they are not expected to continue in future periods. It should be a one time thing.

5. A Treasury Strip is a zero coupon security.

True

False

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

Explanation

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

6. Generally speaking, IFRS and US GAAP have similar accounting treatment of income taxes. However, while ******* prohibits upward revaluations, ******* allows upward revaluations and any resulting effects on deferred tax are recognized in equity.

IFRS / US GAAP

US GAAP / IFRS

US GAAP allows upward revaluations and any resulting effects on deferred tax are recognized in equity, while IFRS prohibits upward revaluations. This means that under US GAAP, if there is an increase in the value of an asset, it can be revalued upwards and any resulting effects on deferred tax will be recognized in equity. However, under IFRS, upward revaluations are not allowed, so any increase in the value of an asset will not impact the deferred tax and will not be recognized in equity.

Explanation

US GAAP allows upward revaluations and any resulting effects on deferred tax are recognized in equity, while IFRS prohibits upward revaluations. This means that under US GAAP, if there is an increase in the value of an asset, it can be revalued upwards and any resulting effects on deferred tax will be recognized in equity. However, under IFRS, upward revaluations are not allowed, so any increase in the value of an asset will not impact the deferred tax and will not be recognized in equity.

7. ***** is more rules-based. ***** is more principle-based.

IFRS / US GAAP

US GAAP / IFRS

For example, when an asset is leased both IFRS and US GAAP require the lessee to treat it as a finance lease if most of the ownership is being absorbed by the lessee. However, since US GAAP has a rules-based approach, there are specific criteria given to help determine this. IFRS is more subjective.

Explanation

For example, when an asset is leased both IFRS and US GAAP require the lessee to treat it as a finance lease if most of the ownership is being absorbed by the lessee. However, since US GAAP has a rules-based approach, there are specific criteria given to help determine this. IFRS is more subjective.

8. A Treasury Strip is a zero-coupon security.

True

False

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

Explanation

The strip is a zero-coupon security, so it has no cash flows to reinvest and therefore no reinvestment risk.

9. Which body gives firms the option to revalue assets based on fair value under the revaluation model?

IFRS

US GAAP

Under IFRS, assets may be revalued upward to fair value. Gains reversing previous writedowns are reported on the income statement, and any excess gains are taken as an adjustment to equity in an account called REVALUATION SURPLUS.

Under US GAAP, long lived assets cannot be revalued upward, except that held-for-sale assets can be revalued upward to the extent of previous impairment writedowns.

Explanation

Under IFRS, assets may be revalued upward to fair value. Gains reversing previous writedowns are reported on the income statement, and any excess gains are taken as an adjustment to equity in an account called REVALUATION SURPLUS.

Under US GAAP, long lived assets cannot be revalued upward, except that held-for-sale assets can be revalued upward to the extent of previous impairment writedowns.

10. Held-for-trading securities are reported on the balance sheet at:

Fair value

Amortized cost

Unamortized cost

Held-for-trading securities are reported on the balance sheet at FAIR VALUE and any unrealized gains and losses are recognized in the income statement.

Explanation

Held-for-trading securities are reported on the balance sheet at FAIR VALUE and any unrealized gains and losses are recognized in the income statement.

11. T, F, Chi-Square are examples of:

Parametric tests

Non-parametric tests

these are all PARAMETRIC tests and make assumptions about the distribution.

Explanation

these are all PARAMETRIC tests and make assumptions about the distribution.

12. IFRS does not allow extraordinary items but US GAAP does.

True

False

Under IFRS (International Financial Reporting Standards), the concept of extraordinary items has been eliminated. Extraordinary items refer to events or transactions that are both unusual and infrequent, and their inclusion in financial statements could distort the overall financial performance of a company. On the other hand, US GAAP (Generally Accepted Accounting Principles) still allows for the recognition of extraordinary items. This difference in treatment between IFRS and US GAAP regarding extraordinary items is why the statement "IFRS does not allow extraordinary items but US GAAP does" is true.

Explanation

Under IFRS (International Financial Reporting Standards), the concept of extraordinary items has been eliminated. Extraordinary items refer to events or transactions that are both unusual and infrequent, and their inclusion in financial statements could distort the overall financial performance of a company. On the other hand, US GAAP (Generally Accepted Accounting Principles) still allows for the recognition of extraordinary items. This difference in treatment between IFRS and US GAAP regarding extraordinary items is why the statement "IFRS does not allow extraordinary items but US GAAP does" is true.

13. Under US GAAP, dividends received can be considered financing cash flows.

True

False

Under US GAAP, dividends received are OPERATING cash flows.

Explanation

Under US GAAP, dividends received are OPERATING cash flows.

14. Which body allows extraordinary items?

IFRS only

US GAAP only

Both

IFRS DOES NOT ALLOW EXTRAORDINARY ITEMS Remember that Extraordinary Items (both unusual and infrequent) are reported below income from continuing operations, net of tax.

Explanation

IFRS DOES NOT ALLOW EXTRAORDINARY ITEMS Remember that Extraordinary Items (both unusual and infrequent) are reported below income from continuing operations, net of tax.

15. ***** is a measure of interest rate sensitivity, expressed by the slope of the price-yield function. ***** is a measure of the degree of curvature of the price/yield relationship

Convexity / Duration

Duration / Convexity

Think of it like this, convexity accounts for the error in the estimated change in a bond's price based on duration.

Explanation

Think of it like this, convexity accounts for the error in the estimated change in a bond's price based on duration.

16. Total assets / total equity

Current Ratio

Defensive Interval

Financial Leverage

Don't assume that just because sales or profit increased that it was a result of increased leverage.

Explanation

Don't assume that just because sales or profit increased that it was a result of increased leverage.

17. IFRS and US GAAP generally agree with their overall framework and purpose, but which body requires users to consider the framework in the absence of a specific standard?

US GAAP only

IFRS only

Both IFRS and US GAAP

IFRS requires users to consider the framework in the absence of a specific standard. This means that when there is no specific standard applicable to a particular situation, users of IFRS should refer to the overall framework to make accounting judgments and decisions. US GAAP, on the other hand, does not have a similar requirement. Therefore, the correct answer is IFRS only.

Explanation

IFRS requires users to consider the framework in the absence of a specific standard. This means that when there is no specific standard applicable to a particular situation, users of IFRS should refer to the overall framework to make accounting judgments and decisions. US GAAP, on the other hand, does not have a similar requirement. Therefore, the correct answer is IFRS only.

18. Under *******, an asset is impaired when its carrying value exceeds the recoverable amount. The recoverable amount is the greater of fair value less selling costs and the value in use (PV of expected cash flows).

IFRS

US GAAP

Both A and B

Under IFRS, the asset is impaired if its worth less than what the firm could sell it for less selling costs or worth less than the PV of its expected future cash flows (value-in-use).

Explanation

Under IFRS, the asset is impaired if its worth less than what the firm could sell it for less selling costs or worth less than the PV of its expected future cash flows (value-in-use).

19. Under both IFRS and US GAAP, research costs are expensed as incurred. But under which body are the development costs capitalized?

IFRS

US GAAP

Both A and B

US GAAP requires both research AND development costs to be expensed as incurred. IFRS requires research costs to be expensed but development costs can be capitalized.

Explanation

US GAAP requires both research AND development costs to be expensed as incurred. IFRS requires research costs to be expensed but development costs can be capitalized.

20. A company reporting under standards other than US GAAP that trade in US markets MUST reconcile their statements with US GAAP.

True

False

Companies reporting under standards other than US GAAP that trade in US markets must reconcile their financial statements with US GAAP. This is because US markets require companies to provide financial information that is consistent and comparable, and US GAAP is the standard used in the United States. Reconciling their statements ensures that investors and stakeholders have access to accurate and reliable financial information.

Explanation

Companies reporting under standards other than US GAAP that trade in US markets must reconcile their financial statements with US GAAP. This is because US markets require companies to provide financial information that is consistent and comparable, and US GAAP is the standard used in the United States. Reconciling their statements ensures that investors and stakeholders have access to accurate and reliable financial information.

21. Under IFRS, if an asset is impaired, it is written down to:

The recoverable amount

Fair value

Under IFRS (International Financial Reporting Standards), when an asset is impaired, it is written down to its recoverable amount. The recoverable amount refers to the higher of an asset's fair value less costs to sell and its value in use. This means that the asset is adjusted to its estimated future cash flows, taking into consideration the time value of money. Writing down the asset to its recoverable amount ensures that the carrying value of the asset on the balance sheet reflects its true economic value.

Explanation

Under IFRS (International Financial Reporting Standards), when an asset is impaired, it is written down to its recoverable amount. The recoverable amount refers to the higher of an asset's fair value less costs to sell and its value in use. This means that the asset is adjusted to its estimated future cash flows, taking into consideration the time value of money. Writing down the asset to its recoverable amount ensures that the carrying value of the asset on the balance sheet reflects its true economic value.

22. Impairments can affect cash flow.

True

False

Asset impairments result in losses in the income statement, but they have NO IMPACT ON CASH FLOW since there is no tax or other cash flow effects until the asset is actually disposed of.

Explanation

Asset impairments result in losses in the income statement, but they have NO IMPACT ON CASH FLOW since there is no tax or other cash flow effects until the asset is actually disposed of.

23. The zero-volatility spread (aka Z-spread or static-spread) will equal the nominal spread when the yield curve is:

Upward sloping

Flat

Downward sloping

When the yield curve is flat, it means that the yields on different maturities of bonds are relatively similar. In this scenario, the zero-volatility spread (Z-spread) will equal the nominal spread. The Z-spread is the spread over the risk-free rate that compensates investors for the risk of a bond, while the nominal spread is the difference between the yield on a bond and the yield on a risk-free bond with the same maturity. When the yield curve is flat, the additional compensation for risk provided by the Z-spread is not necessary, so it equals the nominal spread.

Explanation

When the yield curve is flat, it means that the yields on different maturities of bonds are relatively similar. In this scenario, the zero-volatility spread (Z-spread) will equal the nominal spread. The Z-spread is the spread over the risk-free rate that compensates investors for the risk of a bond, while the nominal spread is the difference between the yield on a bond and the yield on a risk-free bond with the same maturity. When the yield curve is flat, the additional compensation for risk provided by the Z-spread is not necessary, so it equals the nominal spread.

24. If a firm buys $100 million worth of materials in a year and on average their accounts payable is $25 million, what is their payables turnover ratio?

0.25

90 days

4

payables turnover=purchases/average trade payables

remember that firms who are important to their suppliers will have a LOWER payables turnover because they don't need to be so prompt with making payments. They use it as a means of short term financing since they know vendors will tolerate it.

Explanation

payables turnover=purchases/average trade payables

remember that firms who are important to their suppliers will have a LOWER payables turnover because they don't need to be so prompt with making payments. They use it as a means of short term financing since they know vendors will tolerate it.

25. The ***** is a collection of business transactions sorted by account. The ***** is a collection of all business activities sorted by date. The ***** is a bookkeeping worksheet in which the balances of all ledgers are compiled into credit and debit columns. It shows account balances at a particular point in time.

General journal / general ledger / trial balance

General ledger / general journal / trial balance

Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system. Provided the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean there are no errors in a company's accounting system. For example, transactions classified improperly or those simply missing from the system could still be material accounting errors that would not be detected by the trial balance procedure.

Explanation

Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system. Provided the total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers. However, this does not mean there are no errors in a company's accounting system. For example, transactions classified improperly or those simply missing from the system could still be material accounting errors that would not be detected by the trial balance procedure.

26. Revenue/average total net assets

Return on assets

Total asset turnover

Fixed asset turnover

ROA=net income/assets

fixed asset turnover=revenue/average net fixed assets

Explanation

ROA=net income/assets

fixed asset turnover=revenue/average net fixed assets

27. Under *******, loss recoveries are permitted as long as they aren't above historical cost. Under *******, loss recoveries are not allowed for assets held-for-use.

IFRS / US GAAP

US GAAP / IFRS

US GAAP / neither body

Under IFRS and US GAAP, loss recoveries are permitted as long as they aren't above historical cost. This means that if an asset's value decreases and then later increases back to its historical cost, the recovery of the loss can be recognized in financial statements. However, under IFRS and US GAAP, loss recoveries are not allowed for assets held-for-use. This means that if an asset is being used in the normal course of business, any loss recovery cannot be recognized in financial statements.

Explanation

Under IFRS and US GAAP, loss recoveries are permitted as long as they aren't above historical cost. This means that if an asset's value decreases and then later increases back to its historical cost, the recovery of the loss can be recognized in financial statements. However, under IFRS and US GAAP, loss recoveries are not allowed for assets held-for-use. This means that if an asset is being used in the normal course of business, any loss recovery cannot be recognized in financial statements.

28. ****** are not traded in US markets ****** trade in local currencies on exchanges in different countries ***** is a negotiable certificate issued by a US bank representing a specified number of shares (or one share) in a foreign stock that is traded on a US exchange.

ADR's, global registered shares, GDR's

GDR's, global registered shares, ADR's

Global registered shares, GDR's, ADR's

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

Explanation

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

29. Available-for-sale securities are reported on the balance sheet at:

Fair value, but not reported on the income statement until sold

Fair value, and unrealized gains/losses are recognized on the income statement

Fair value, and any unrealized gains/losses are reported as other comprehensive income

Available-for-sale securities are reported on the balance sheet at fair value, which means their current market value. However, any unrealized gains or losses on these securities are not immediately recognized on the income statement. Instead, they are reported as other comprehensive income, which is a separate section on the financial statements. This treatment allows investors and analysts to see the true value of the securities on the balance sheet while also providing transparency regarding any changes in value that have not yet been realized through a sale.

Explanation

Available-for-sale securities are reported on the balance sheet at fair value, which means their current market value. However, any unrealized gains or losses on these securities are not immediately recognized on the income statement. Instead, they are reported as other comprehensive income, which is a separate section on the financial statements. This treatment allows investors and analysts to see the true value of the securities on the balance sheet while also providing transparency regarding any changes in value that have not yet been realized through a sale.

30. Callable bonds have lower duration, and therefore less price volatility, than similar option free bonds.

True

False

Callable bonds have lower duration because they have an embedded call option, which allows the issuer to redeem the bond before its maturity date. This means that the bondholder may receive their principal earlier than expected, resulting in a shorter duration. As a result, callable bonds are less sensitive to changes in interest rates and have less price volatility compared to similar option-free bonds. Therefore, the statement is true.

Explanation

Callable bonds have lower duration because they have an embedded call option, which allows the issuer to redeem the bond before its maturity date. This means that the bondholder may receive their principal earlier than expected, resulting in a shorter duration. As a result, callable bonds are less sensitive to changes in interest rates and have less price volatility compared to similar option-free bonds. Therefore, the statement is true.

31. IFRS prohibits the use of the completed contract method and instead employs the cost recovery method.

True

False

When the outcome of a project cannot be reliably estimated, IFRS requires the cost recovery method - revenue is recognized to the extent of contract costs and profit is only recognized at project completion.

Explanation

When the outcome of a project cannot be reliably estimated, IFRS requires the cost recovery method - revenue is recognized to the extent of contract costs and profit is only recognized at project completion.

32. If over the course of a year a company has a total revenues of $64 million, $40 million total cost of goods sold, and an average inventory of $8 million, what is their inventory turnover ratio?

3

5

8

0.2

0.167

INVENTORY TURNOVER=COGS/AVERAGE INVENTORY
or. SALES/INVENTORY

Revenues are irrelevant. Remember that a low inventory turnover indicates poor sales and excess inventory. An inventory turnover ratio that's too high could indicate ineffective buying.

Explanation

INVENTORY TURNOVER=COGS/AVERAGE INVENTORY
or. SALES/INVENTORY

Revenues are irrelevant. Remember that a low inventory turnover indicates poor sales and excess inventory. An inventory turnover ratio that's too high could indicate ineffective buying.

33. In some cases, interest can be an investing or financing cash flow under US GAAP

True

False

under US GAAP, interest is ALWAYS an OPERATING cash flow.

Explanation

under US GAAP, interest is ALWAYS an OPERATING cash flow.

34. Which method is used when the investor can control the investee? (greater than 50% ownership interest)

Consolidation Method

Equity Method

It depends on whether the firm uses IFRS or US GAAP

The correct answer is Consolidation Method. When an investor has greater than 50% ownership interest in an investee, they have control over the investee. In such cases, the Consolidation Method is used to account for the investment. This method involves combining the financial statements of the investor and the investee, as if they were one entity. It allows the investor to reflect their control over the investee and present a comprehensive view of the combined financials.

Explanation

The correct answer is Consolidation Method. When an investor has greater than 50% ownership interest in an investee, they have control over the investee. In such cases, the Consolidation Method is used to account for the investment. This method involves combining the financial statements of the investor and the investee, as if they were one entity. It allows the investor to reflect their control over the investee and present a comprehensive view of the combined financials.

35. Under *******, inventory is reported on the balance sheet at the lower of cost or net realizable value. Under *******, inventory is reported on the balance sheet at the lower of cost or market value. Inventory can be recovered subsequent to a writedown under *******

IFRS / US GAAP / IFRS OR US GAAP

US GAAP / IFRS / IFRS ONLY

IFRS / US GAAP / IFRS ONLY

Remember that when it comes to inventory, US GAAP tends to be more conservative.

Explanation

Remember that when it comes to inventory, US GAAP tends to be more conservative.

36. Under *******, an asset is impaired if its carrying value is greater than the asset's undiscounted future cash flows.

IFRS

US GAAP

Both A and B

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's undiscounted future cash flows. This means that if the asset's value on the balance sheet is higher than the expected cash flows it will generate in the future, it is considered impaired. This impairment is recognized by reducing the carrying value of the asset and recording a loss on the income statement. This is in contrast to IFRS, where the impairment test is based on the asset's recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

Explanation

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's undiscounted future cash flows. This means that if the asset's value on the balance sheet is higher than the expected cash flows it will generate in the future, it is considered impaired. This impairment is recognized by reducing the carrying value of the asset and recording a loss on the income statement. This is in contrast to IFRS, where the impairment test is based on the asset's recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

37. Under US GAAP, interest paid or received is what type of cash flow?

Operating

Investing

Financing

It depends on whether the interest is paid or received

regardless of whether it's interest paid or interest received, interest is classified as an OPERATING cash flow under US GAAP

Explanation

regardless of whether it's interest paid or interest received, interest is classified as an OPERATING cash flow under US GAAP

38. Which method is used when the investor can significantly influence the investee? (between 20%-50% ownership interest)

Consolidation Method

Equity Method

It depends on whether the firm uses IFRS or US GAAP

The equity method is used when the investor can significantly influence the investee, typically with a 20%-50% ownership interest. This method allows the investor to account for its investment in the investee by recognizing its share of the investee's profits or losses in its own financial statements. It is commonly used when the investor has significant influence over the investee's operating and financial policies, but not control. The consolidation method, on the other hand, is used when the investor has control over the investee, typically with ownership interest of more than 50%. The choice between the two methods is not dependent on IFRS or US GAAP.

Explanation

The equity method is used when the investor can significantly influence the investee, typically with a 20%-50% ownership interest. This method allows the investor to account for its investment in the investee by recognizing its share of the investee's profits or losses in its own financial statements. It is commonly used when the investor has significant influence over the investee's operating and financial policies, but not control. The consolidation method, on the other hand, is used when the investor has control over the investee, typically with ownership interest of more than 50%. The choice between the two methods is not dependent on IFRS or US GAAP.

39. In the case of business combinations with joint control, the proportionate consolidation method is preferred under ****** but the equity method is required under *******.

IFRS/ US GAAP

US GAAP / IFRS

Proportionate consolidation is NOT ALLOWED UNDER US GAAP

IFRS prefers Proportionate Consolidation in this case, but the equity method could also be used.

Explanation

Proportionate consolidation is NOT ALLOWED UNDER US GAAP

IFRS prefers Proportionate Consolidation in this case, but the equity method could also be used.

40. Under US GAAP, dividends paid are operating cash flows

True

False

Under US GAAP, dividends paid are FINANCING cash flows!

Explanation

Under US GAAP, dividends paid are FINANCING cash flows!

41. Held-to-maturity securities are reported on the balance sheet at:

Fair value

Amortized cost

Unamortized cost

Held-to-maturity securities are recognized on the balance sheet at AMORTIZED COST. Amortized cost is equal to the face (par) value less any unamortized discount or plus any unamortized premium.

Explanation

Held-to-maturity securities are recognized on the balance sheet at AMORTIZED COST. Amortized cost is equal to the face (par) value less any unamortized discount or plus any unamortized premium.

42. When a firm reporting under US GAAP cannot reliably estimate the outcome of a project, it must use the:

Completed contract method

Cost recovery method

When a firm reporting under US GAAP cannot reliably estimate the outcome of a project, it must use the completed contract method. This method recognizes revenue and expenses only when the project is completed, rather than recognizing them over the course of the project. This is because the firm cannot accurately determine the financial impact of the project until it is finished. By using the completed contract method, the firm can avoid making unreliable estimates and ensure that the financial statements reflect the actual outcome of the project.

Explanation

When a firm reporting under US GAAP cannot reliably estimate the outcome of a project, it must use the completed contract method. This method recognizes revenue and expenses only when the project is completed, rather than recognizing them over the course of the project. This is because the firm cannot accurately determine the financial impact of the project until it is finished. By using the completed contract method, the firm can avoid making unreliable estimates and ensure that the financial statements reflect the actual outcome of the project.

43. Which framework gives more emphasis on the importance of accrual and going concern assumptions?

FASB (US GAAP)

IASB (IFRS)

IASB framework gives more emphasis to the importance of the accrual and going concern assumptions than the FASB framework does.

Explanation

IASB framework gives more emphasis to the importance of the accrual and going concern assumptions than the FASB framework does.

44. Which body uses UNDISCOUNTED cash flows to determine whether or not an asset is impaired?

IFRS

US GAAP

Both A and B

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's UNDISCOUNTED future cash flows. If impaired, the asset is written down to fair value. Subsequent recoveries are not allowed for assets held-for-use.

Explanation

Under US GAAP, an asset is impaired if its carrying value is greater than the asset's UNDISCOUNTED future cash flows. If impaired, the asset is written down to fair value. Subsequent recoveries are not allowed for assets held-for-use.

45. Under US GAAP, dividends paid are

Operating Cash Flows

Investing Cash Flows

Financing Cash Flows

A or C

Under US GAAP, dividends PAID are FINANCING CASH FLOWS. Dividends received are operating cash flows.

Explanation

Under US GAAP, dividends PAID are FINANCING CASH FLOWS. Dividends received are operating cash flows.

46. Under US GAAP, if an asset is impaired, it is written down to:

The recoverable amount

Fair value

Under US GAAP, if an asset is impaired, it is written down to fair value. This means that the value of the impaired asset is adjusted to reflect its current market value. Fair value represents the price at which the asset could be sold in an orderly transaction between market participants. Writing down the asset to fair value ensures that the financial statements provide a more accurate representation of the asset's value, taking into consideration any decrease in its value due to impairment.

Explanation

Under US GAAP, if an asset is impaired, it is written down to fair value. This means that the value of the impaired asset is adjusted to reflect its current market value. Fair value represents the price at which the asset could be sold in an orderly transaction between market participants. Writing down the asset to fair value ensures that the financial statements provide a more accurate representation of the asset's value, taking into consideration any decrease in its value due to impairment.

47. Under IFRS, dividends paid are reported as what type of cash flow?

Operating only

Financing only

Investing only

Operating or Financing

Operating or Investing

Financing or Investing

Under IFRS, dividends paid can be reported as either operating or financing cash flows

Explanation

Under IFRS, dividends paid can be reported as either operating or financing cash flows

48. Under IFRS, interest paid is reported as what type of cash flow?

Operating only

Financing only

Investing only

Operating or Financing

Operating or Investing

Financing or Investing

Under IFRS, interest paid can be reported as either operating or financing cash flows.

Explanation

Under IFRS, interest paid can be reported as either operating or financing cash flows.

49. The construction of pro forma financial statements begins with an assumption about which fundamental variable influences (or "drives") changes in income statement and balance sheet items. The most common financial statement "driver" is:

Net income

Total assets

Sales

Typically, the initial step in the development of pro forma financial statements is to forecast future revenues (sales). It is then commonly assumed that changes in sales will result in proportional changes in financial statement items such as cost of goods sold, current assets, current liabilities, and fixed assets. Thus, it can be said that changes in sales “drive” many pro forma income statement and balance sheet items.

Explanation

Typically, the initial step in the development of pro forma financial statements is to forecast future revenues (sales). It is then commonly assumed that changes in sales will result in proportional changes in financial statement items such as cost of goods sold, current assets, current liabilities, and fixed assets. Thus, it can be said that changes in sales “drive” many pro forma income statement and balance sheet items.

50. Under US GAAP, dividends received are

Operating Cash Flows

Investing Cash Flows

Financing Cash Flows

A or B

Under US GAAP, dividends PAID are financing cash flows. Dividends received are OPERATING cash flows.

Explanation

Under US GAAP, dividends PAID are financing cash flows. Dividends received are OPERATING cash flows.

51. At the beginning of an interest rate swap, the parties exchange the notional principal.

True

False

The counterparties do not exchange principal on an interest rate swap!!! Also remember, there is typically no margin deposit on IRS.

Explanation

The counterparties do not exchange principal on an interest rate swap!!! Also remember, there is typically no margin deposit on IRS.

52. ****** are not traded in US markets ****** trade in local currencies on exchanges in different countries ***** is a negotiable certificate issued by a US bank representing a specified number of shares (or one share) in a foreign stock that is traded on a US exchange.

ADR's, global registered shares, GDR's

GDR's, global registered shares, ADR's

Global registered shares, GDR's, ADR's

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

Explanation

Global Depository Receipts are not traded in US markets.

Remember, ADR's are issued by a US bank and represent shares of a foreign stock. ADR's trade on US exchanges and are denominated in US dollars.

53. Flotation costs should not be used when calculating the cost of new equity.

True

False

Flotation costs represent the cost for a publicly traded company to issue new securities (often expressed as a percentage of the stock price).

The correct way to account for flotation costs when performing NPV analysis is to increase the initial cost of the project by the amount of the flotation costs. Flotation costs should not be reflected in the equity component of the weighted average cost (the discount rate) used in NPV analysis because they represent a one-time expense that occurs only at the initiation of a project.

Explanation

Flotation costs represent the cost for a publicly traded company to issue new securities (often expressed as a percentage of the stock price).

The correct way to account for flotation costs when performing NPV analysis is to increase the initial cost of the project by the amount of the flotation costs. Flotation costs should not be reflected in the equity component of the weighted average cost (the discount rate) used in NPV analysis because they represent a one-time expense that occurs only at the initiation of a project.

54. Component depreciation, a method in which significant parts of an asset are identified and depreciated separately, is required under what body?

IFRS

US GAAP

Both A and B

Neither body requires component depreciation

IFRS requires component depreciation.

Explanation

IFRS requires component depreciation.

55. Compared to using the LIFO method, during a period of rising prices, using FIFO will cause: ***** interest coverage ratio ***** inventory turnover ratio

Lower / higher

Higher / higher

Higher / lower

Lower / lower

interest coverage= EBIT/interest expense

using FIFO during a period of rising prices will increase EBIT and thereby increase the interest coverage ratio.

inventory turnover=COGS/average inventory

inventory turnover would be lower under LIFO since COGS would be lower and average inventory would be higher

Explanation

interest coverage= EBIT/interest expense

using FIFO during a period of rising prices will increase EBIT and thereby increase the interest coverage ratio.

inventory turnover=COGS/average inventory

inventory turnover would be lower under LIFO since COGS would be lower and average inventory would be higher

56. Dealers sell securities and commit to buy them back at a later date to finance the purchase of ***** Dealers use repurchase agreements to finance the purchase of *****

Bonds / securities

Securities / bonds

Dealers use repurchase agreements to finance the purchase of bonds and securities. Repurchase agreements, also known as repos, involve the selling of securities with a commitment to buy them back at a later date. This allows dealers to obtain the necessary funds to finance their purchases while providing liquidity to the market. By using repos, dealers can access short-term funding and engage in trading activities without needing to sell their securities outright.

Explanation

Dealers use repurchase agreements to finance the purchase of bonds and securities. Repurchase agreements, also known as repos, involve the selling of securities with a commitment to buy them back at a later date. This allows dealers to obtain the necessary funds to finance their purchases while providing liquidity to the market. By using repos, dealers can access short-term funding and engage in trading activities without needing to sell their securities outright.

57. Under IFRS, interest received is reported as what type of cash flow?

Operating only

Financing only

Investing only

Operating or Financing

Operating or Investing

Financing or Investing

Under IFRS, interest received can be reported as either operating or investing cash flows.

Explanation

Under IFRS, interest received can be reported as either operating or investing cash flows.

58. If the fair value of a held-to-maturity security increases substantially, the fair value is adjusted on the balance sheet.

True

False

NO! they are reported at their amortized cost. Subsequent changes in fair value are ignored unless the security is sold or otherwise disposed of.

Explanation

NO! they are reported at their amortized cost. Subsequent changes in fair value are ignored unless the security is sold or otherwise disposed of.

59. ****** is an active management strategy of deviating from the portfolio's target asset allocation to take advantage of short term opportunities in the market

Strategic asset allocation

Integral asset allocation

Tactical asset allocation

A portfolio manager performs strategic asset allocation when she determines the portfolio weights in each of the appropriate asset classes that will best meet the investor’s return and risk objectives. Tactical asset allocation is an active management strategy of deviating from the target asset allocation to take advantage of short-term opportunities.

Explanation

A portfolio manager performs strategic asset allocation when she determines the portfolio weights in each of the appropriate asset classes that will best meet the investor’s return and risk objectives. Tactical asset allocation is an active management strategy of deviating from the target asset allocation to take advantage of short-term opportunities.

60. A ***** is a balance sheet line item that offsets all or a portion of the value of a company's deferred tax assets because the company doesn't expect it will be able to realize this value.

Deferred income tax expense

Valuation allowance

Tax loss carryforward

Deferred income tax expense is the excess of income tax expense over taxes payable.
A tax loss carryforward is a loss that could not be deducted on the current period's tax return but can be used to reduce taxable income in future periods.

The correct answer is valuation allowance, a contra account that reduces a deferred tax asset for the probability that it will not be realized. It's required under US GAAP when there is a greater than 50% probability that some DTA will not be realized.

Explanation

Deferred income tax expense is the excess of income tax expense over taxes payable.
A tax loss carryforward is a loss that could not be deducted on the current period's tax return but can be used to reduce taxable income in future periods.

The correct answer is valuation allowance, a contra account that reduces a deferred tax asset for the probability that it will not be realized. It's required under US GAAP when there is a greater than 50% probability that some DTA will not be realized.

61. Under ******, impairment must be tested annually.

IFRS

US GAAP

Both A and B

Under IFRS, the firm must annually asses whether events or circumstances indicate an impairment of the asset's value has occurred.

Explanation

Under IFRS, the firm must annually asses whether events or circumstances indicate an impairment of the asset's value has occurred.

62. Has a claim to equal percentage shares of the interest and payments, with monthly (not semiannual) cash flows that consist of interest, scheduled principal repayments, and principal prepayments.

Asset backed securities

Mortgage passthrough security

Collateralized mortgage obligation

A mortgage passthrough security is a type of investment that represents a claim to equal percentage shares of the interest and payments from a pool of mortgages. The cash flows from this security consist of monthly (not semiannual) payments that include interest, scheduled principal repayments, and principal prepayments. This means that investors in a mortgage passthrough security receive a portion of the interest and principal payments made by borrowers on the underlying mortgages.

Explanation

A mortgage passthrough security is a type of investment that represents a claim to equal percentage shares of the interest and payments from a pool of mortgages. The cash flows from this security consist of monthly (not semiannual) payments that include interest, scheduled principal repayments, and principal prepayments. This means that investors in a mortgage passthrough security receive a portion of the interest and principal payments made by borrowers on the underlying mortgages.

63. Have tranches with different prepayment risk or maturity characteristics.

Asset backed securities

Mortgage passthrough security

Collateralized mortgage obligation

Remember that CMO's are created from mortgage passthrough securities.

Explanation

Remember that CMO's are created from mortgage passthrough securities.

64. Which body distinguishes between objectives for the business and non-business entities?

IFRS

US GAAP

US GAAP (Generally Accepted Accounting Principles) is the body that distinguishes between objectives for the business and non-business entities. US GAAP provides guidelines and standards for financial reporting for both business and non-business entities, ensuring that they follow the appropriate accounting principles and present their financial information accurately and consistently. IFRS (International Financial Reporting Standards) is another accounting framework that is used globally, but it does not specifically distinguish between objectives for business and non-business entities.

Explanation

US GAAP (Generally Accepted Accounting Principles) is the body that distinguishes between objectives for the business and non-business entities. US GAAP provides guidelines and standards for financial reporting for both business and non-business entities, ensuring that they follow the appropriate accounting principles and present their financial information accurately and consistently. IFRS (International Financial Reporting Standards) is another accounting framework that is used globally, but it does not specifically distinguish between objectives for business and non-business entities.

65. Under IFRS, dividends received are reported as what type of cash flow?

Operating only

Financing only

Investing only

Operating or Financing

Operating or Investing

Financing or Investing

Under IFRS, dividends received can be reported as either operating or investing cash flows.

Explanation

Under IFRS, dividends received can be reported as either operating or investing cash flows.

66. A hedge fund that uses a high degree of leverage to profit from expected changes in exchange rates or interest rates is best described as a:

Derivative fund

Global macro fund

Long/short fund

Global macro funds attempt to profit from the direction of a market, currency, interest rate, or other economic variables. They typically are highly leveraged and use derivatives extensively.

Explanation

Global macro funds attempt to profit from the direction of a market, currency, interest rate, or other economic variables. They typically are highly leveraged and use derivatives extensively.

67. Corporate debentures are not subject to prepayment risk.

True

False

Corporate debentures are not subject to prepayment risk because they are typically issued with a fixed maturity date. Unlike other types of debt securities, such as callable bonds, debentures do not give the issuer the option to repay the principal amount before the maturity date. This means that investors can rely on receiving interest payments and the return of their principal at the specified maturity date without the risk of early repayment.

Explanation

Corporate debentures are not subject to prepayment risk because they are typically issued with a fixed maturity date. Unlike other types of debt securities, such as callable bonds, debentures do not give the issuer the option to repay the principal amount before the maturity date. This means that investors can rely on receiving interest payments and the return of their principal at the specified maturity date without the risk of early repayment.

68. Operating Profit Margin is equal to:

Operating profit / revenue

EBIT / net sales

Both A and B

The correct answer is both A and B. Operating profit margin can be calculated by dividing operating profit by revenue or by dividing EBIT (earnings before interest and taxes) by net sales. Both formulas provide the same result, which represents the profitability of a company's core operations as a percentage of its revenue.

Explanation

The correct answer is both A and B. Operating profit margin can be calculated by dividing operating profit by revenue or by dividing EBIT (earnings before interest and taxes) by net sales. Both formulas provide the same result, which represents the profitability of a company's core operations as a percentage of its revenue.

69. Are collateralized by financial assets that the corporation has sold to a separate legal entity. They lower borrowing costs when the separate entity (SPV) can attain a higher credit rating than the corporation. Under the SPV structure, financial difficulties of the corporation should not affect this type of security's credit. This type of security may also have other credit enhancements in the form of guarantees, a bank letter of credit, or bond insurance which further reduce borrowing costs.

ABS

CDO

CMO

Asset-backed securities (ABS) are collateralized by financial assets that the corporation has sold to a separate legal entity, known as a special purpose vehicle (SPV). These securities help lower borrowing costs for the corporation because the SPV can attain a higher credit rating than the corporation itself. This means that even if the corporation faces financial difficulties, the credit of the ABS should remain unaffected. Additionally, ABS may have other credit enhancements such as guarantees, bank letters of credit, or bond insurance, which further reduce borrowing costs.

Explanation

Asset-backed securities (ABS) are collateralized by financial assets that the corporation has sold to a separate legal entity, known as a special purpose vehicle (SPV). These securities help lower borrowing costs for the corporation because the SPV can attain a higher credit rating than the corporation itself. This means that even if the corporation faces financial difficulties, the credit of the ABS should remain unaffected. Additionally, ABS may have other credit enhancements such as guarantees, bank letters of credit, or bond insurance, which further reduce borrowing costs.

70. Under ******, an asset is tested for impairment only when events and circumstances indicate the firm may not be able to recover the carrying value through future use.

IFRS

US GAAP

Both A and B

None of the above

Remember that under US GAAP determining the impairment will potentially involve 2 steps:
1) Recoverability (based on undiscounted cash flows)
2) Loss measurement (uses fair value, or discounted cash flows if fair value is not known)

Explanation

Remember that under US GAAP determining the impairment will potentially involve 2 steps:
1) Recoverability (based on undiscounted cash flows)
2) Loss measurement (uses fair value, or discounted cash flows if fair value is not known)

71. Under US GAAP, assets can never be valued upward.

True

False

US GAAP generally doesn't allow assets cannot be revalued upward, except that held-for-sale assets can be revalued upward to the extent of previous impairment writedowns.

Explanation

US GAAP generally doesn't allow assets cannot be revalued upward, except that held-for-sale assets can be revalued upward to the extent of previous impairment writedowns.

72. Under *****, firms remove the unrecognized actuarial gains and losses and unrecognized prior service cost from the funded status. The result is a balance sheet that doesn't represent economic reality.

IFRS

US GAAP

Both A and B

Under IFRS (International Financial Reporting Standards), firms remove the unrecognized actuarial gains and losses and unrecognized prior service cost from the funded status. This means that these elements are not included in the balance sheet, resulting in a balance sheet that does not accurately reflect the economic reality of the firm.

Explanation

Under IFRS (International Financial Reporting Standards), firms remove the unrecognized actuarial gains and losses and unrecognized prior service cost from the funded status. This means that these elements are not included in the balance sheet, resulting in a balance sheet that does not accurately reflect the economic reality of the firm.

73. Under IFRS, taxes paid are always operating cash flows.

True

False

Under IFRS, taxes paid are operating cash flows except when they arise from an investing or financing transaction.

Explanation

Under IFRS, taxes paid are operating cash flows except when they arise from an investing or financing transaction.

74. Positive roll yield is most likely when the predominant traders are speculators.

Speculators

Producers of the commodity

Users of the commodity

Markets in which the predominant traders are commodity producers, hedging against declines in the price of the commodity by selling futures (short hedgers), tend to be in backwardation, with futures prices less than spot prices. Roll yield is positive when a futures market is in backwardation.

Explanation

Markets in which the predominant traders are commodity producers, hedging against declines in the price of the commodity by selling futures (short hedgers), tend to be in backwardation, with futures prices less than spot prices. Roll yield is positive when a futures market is in backwardation.

75. Aries Industries has purchased a warehouse that it uses as rental property for income. Aries uses the fair value model to account for the value of the warehouse on its balance sheet. With regard to the treatment of this asset on Aries's financial statements:

The warehouse may not be revalued to an amount above original cost.

Any revaluation above original cost will not be shown on the income statement.

Any revaluation above original cost will increase reported income and equity.

Remember to assume IFRS unless US GAAP is stated. Under IFRS (but not US GAAP) a property held by a firm for capital appreciation or to collect rental income is classified as an investment property.

Firms can value investment property using either the cost model or a fair value model. Under the fair value model, increases in value above historical cost are recognized as gains on the income statement. This differs from the revaluation model for PP&E where increases above historical cost are recognized in equity as revaluation surplus.

Explanation

Remember to assume IFRS unless US GAAP is stated. Under IFRS (but not US GAAP) a property held by a firm for capital appreciation or to collect rental income is classified as an investment property.

Firms can value investment property using either the cost model or a fair value model. Under the fair value model, increases in value above historical cost are recognized as gains on the income statement. This differs from the revaluation model for PP&E where increases above historical cost are recognized in equity as revaluation surplus.

76. Which of the following tests the equality of variances of 2 independent populations?

Chi-Square

Z-statistic

Student's T distibution

F-statistic

the F-statistic tests the equality of variances of two independent populations. For example, are the SAT scores distributed much differently for the senior class at a private school vs a public school.

Explanation

the F-statistic tests the equality of variances of two independent populations. For example, are the SAT scores distributed much differently for the senior class at a private school vs a public school.

77. The principal of TIPS is adjusted for inflation:

Monthly

Quarterly

Semiannually

Annually

The principal of TIPS (Treasury Inflation-Protected Securities) is adjusted for inflation semiannually. This means that every six months, the principal amount of the TIPS bond is adjusted to reflect changes in the Consumer Price Index (CPI) and maintain its real value. By adjusting semiannually, investors are protected against inflation and can ensure that their investment keeps pace with the rising cost of living.

Explanation

The principal of TIPS (Treasury Inflation-Protected Securities) is adjusted for inflation semiannually. This means that every six months, the principal amount of the TIPS bond is adjusted to reflect changes in the Consumer Price Index (CPI) and maintain its real value. By adjusting semiannually, investors are protected against inflation and can ensure that their investment keeps pace with the rising cost of living.

78. Derivatives markets are most likely to:

Reduce transaction costs

Provide arbitrage opportunities to investors

Increase speculation and risk

The key advantages of derivatives markets are providing price information, reducing transactions costs, and shifting risks among market participants. Derivatives markets are highly efficient and arbitrage opportunities rarely exist or are quickly eliminated.

Explanation

The key advantages of derivatives markets are providing price information, reducing transactions costs, and shifting risks among market participants. Derivatives markets are highly efficient and arbitrage opportunities rarely exist or are quickly eliminated.

79. Interest on a construction project must be capitalized under...

IFRS

US GAAP

Both A and B

Not required under either body

both IFRS and US GAAP require interest on a construction project to be capitalized.

Explanation

both IFRS and US GAAP require interest on a construction project to be capitalized.

80. An investor in the United States purchases receipts on a U.S. exchange that each represent ownership of 1.7 shares of a firm that trades on the Bulgarian Stock Exchange. If the investor has the right to vote the shares, he has most likely purchased:

Global depository receipts